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By BETSY TAYLOR

The financially strapped hospitals of the Daughters of Charity Health System have become the newly created Verity Health System of California, after the Daughters of Charity Health System closed on a deal with BlueMountain Capital Management on Dec. 14.

The New York-based investment firm's health care management subsidiary, Integrity Healthcare, is managing the five hospitals, a skilled nursing facility and the medical foundation formerly operated by the Catholic nonprofit system and will do so for a minimum of 15 years. Verity Health System is a secular nonprofit.

Daughters of Charity Health System President and Chief Executive Robert Issai said the Catholic sponsorship of the system, by the Daughters of Charity Province of the West, ended at the time of the transaction.

Verity Health System has proposed a set of values for the health system that it said are similar to the Vincentian values of the Catholic health care system. It said it will hold forums for hospital employees and physicians this year to invite their thoughts on the statement of values.

Recapitalization
BlueMountain agreed to contribute up to $260 million of capital, and has the option to purchase the Daughters of Charity Health System after three years. That option expires in 2030. If the option is exercised, the health care system would become a for-profit system, said those who worked on the agreement.

Issai said, "This large infusion of capital will provide a great jump-start on the many strategic, operational and capital initiatives desperately needed in our hospitals." Issai's president and chief executive position with Daughters of Charity Health System, a job he began in 2006, ended with the completion of the transaction.

"Obviously, this was bittersweet," Issai said of the shift of control of the health care system, "not only for me — I've been with the Daughters for almost 25 years — but for a lot of other people." Issai had held several leadership roles at Daughters of Charity health care facilities. While the loss of Catholic identity has been difficult for those who sponsored and worked for the system, Issai called BlueMountain an "outstanding" organization.

The agreement preserves the system's mission of charity care, honors existing labor agreements and preserves the pensions of more than 17,000 current and former employees, he said.

Financial targets
Mitchell R. Creem, chief executive of Verity Health System, said Verity will continue the mission of care begun by the Daughters of Charity more than 150 years ago. According to his biography on the Verity website, Creem led several hospitals through the implementation of financial turnaround plans and times of transition. For instance, his LinkedIn profile notes he was chief executive of Keck Hospital of USC and the USC Norris Cancer Hospital from 2008 to 2012, leading the ownership transition from Tenet Healthcare to the university.

Creem said the financial infusion will bring improvements for the system. "We need to make investments in hospitals' facilities and equipment to bring them up to more contemporary medical standards. We need to attract many of the physicians who have left or are splitting time with other community hospitals."

He said it had been a source of staff anxiety in recent years to not know "who would be the potential buyer or whether or not the hospitals would even be in bankruptcy." He said the commitment of new investment dollars and the new management team has been met with relief by employees. The system has California facilities from the San Francisco Bay area to Los Angeles.

Rick Rice, a spokesperson for Daughters of Charity Health System at the time of the transaction in mid-December, said the health care system had about 7,000 employees.

Integrity Healthcare can assess a management fee of up to 4 percent of the Verity Health System's annual revenue. Creem said there's a long list of things that must be done to financially improve the system before Integrity collects the management fee. He explained, "It can be as much as 4 percent, but not until the system has turned around its financial positions, not until the pension is funded and the debts are repaid."

Regulatory requirements
California Attorney General Kamala Harris approved the BlueMountain transaction on Dec. 3, imposing conditions she said are intended to ensure continuity of care for Californians, including the investment of $180 million in capital improvements at health care system facilities.

For five years, St. Vincent Medical Center in Los Angeles must operate as a general acute care hospital, providing 24-hour emergency medical services, according to a statement from Harris' office.

For 10 years, St. Francis Medical Center in Lynwood, O'Connor Hospital in San Jose, Saint Louise Regional Hospital in Gilroy and Seton Medical Center in Daly City must operate as acute care hospitals and offer emergency services. Also for a decade, Seton Coastside in Moss Beach must operate as a skilled nursing facility with 24-hour emergency services and at least 116 skilled nursing beds.

The California attorney general's office said the six facilities must maintain the same levels of emergency and nonemergency services to patients using Medi-Cal, California's Medicaid program, and maintain Medi-Cal managed care contracts at each of the facilities. Charity care and community benefit must be provided at historical levels. Reproductive health care services must be available at the system's facilities and medical office buildings.

Arc of history
While Daughters of Charity Health System was based in Los Altos Hills, Calif., Verity has its corporate headquarters in Redwood City, Calif., and its system office is based in Los Angeles.

The Daughters of Charity congregation started their health care mission in California in 1858 with the opening of Los Angeles Infirmary, now St. Vincent Medical Center. They created a regional health care system, forming Daughters of Charity Health System in 2002.

The Daughters of Charity Health System began negotiating a merger with St. Louis-based Ascension Health (now Ascension) in 2012, but the systems didn't proceed, in part because geographic alignment between the two systems' facilities was missing, Issai said at the time.

In October 2014, the Daughters of Charity Health System Board of Directors approved a sale to Prime Healthcare Services of Ontario, Calif. But in March 2015, Prime decided not to purchase the health care system after Harris approved the sale with conditions that Prime called "extensive."

The switch in control to Verity required alienation of church property. Issai said some religious artifacts, such as the crucifixes in patient rooms, were given as gifts "to associates as a token of our appreciation." Other religious items belonging to the Daughters of Charity were returned to the congregation, according to a Verity spokesperson.

 

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